Abstract:
The relationship between unit trust (mutual fund) performance and
subsequent investment flows into and out of funds has been the focus
of many international studies. Emerging markets, which are
characterised by higher risk, weaker institutions, volatile economies and
fewer participants, provide an attractive opportunity to examine the
flow-performance problem in the context of higher arbitrage costs.
This study builds on the findings in the literature of the flowperformance
relationship and aims to examine in more detail, and to
quantify, the inflow into funds which outperform. The flow-performance
relationship is important for investment businesses to understand
because of the significant implications this has on the profitability of funds.
The research applies a portfolio time-series methodology to
Morningstar’s South African fund data, using a buy-and-hold analysis.
Two unit trust categories are tested, namely General Equity and Multiasset
High Equity funds, and within each category, single manager funds
and fund of funds are tested separately.
Funds are ranked by their past performance over an optimised 14-
month look-back period, and assigned into quintiles. Net flows into each
fund in the subsequent quarter are then determined, and the process
rolled over on a quarterly basis from 2000 to 2015. We find convincing
evidence from an emerging market perspective that equity funds need
to perform in the top quintile to attract funds, and observe that relative
performance to peers is more important to investors than performance
relative to other benchmarks. One additional inference is that the South
African unit trust industry is set to face consolidation.
